In dictionary terms, a Fulfillment Center is an operation that facilitates the storage and shipping of products. This can be internal or external, meaning companies can operate a fulfillment center for their own needs or also to provide fulfillment as a service to other companies.
Fulfillment centers are used by small businesses as well as large corporations. They have a lot of benefits for the right business but they are certainly more popular within eCommerce businesses. Don’t get me wrong, brick & mortar businesses use them too but the purpose and stage at which they are used is a bit different.
Many large corporations use fulfillment centers to distribute their products across their stores.
When you go to a store like Canadian Tire to purchase products, you can see what they have in store and are able to purchase items on the spot. If you were to go to canadiantire.ca and place an order, the order would likely be shipped from their fulfillment center to our address.
Some other terms that are synonymous with Fulfillment Center: 3PL, Distribution Center, Picking & Packing Center, Shipping Warehouse, Storage Warehouse, Fulfillment House.
What is a 3PL?
A 3PL is a business that provides fulfillment services to other businesses. It is an “external” fulfillment center. Businesses rely on 3PLs to help save time, cut down costs, extend capacities or all of the above. 3PLs have existed for 100s of years but thanks to the technology boom and ease of communication, 3PL businesses are now flourishing.
The industry is relatively large and certain 3PLs have specialized in certain categories. In the eCommerce world, there are certain 3PLs that only serve Subscription Box Businesses. There are 3PLs that only deal with small products and others that deal with large products only. Most 3PLs won’t store food products but there are also 3PLs that only store food products. No matter what category the 3PL specializes in, it’s important for them to be flexible as their clients can have varying requirements.
Components of a Fulfillment Center
Although there are different types of fulfillment centers, almost all of them share the following components:
Fulfillment Centers make money by doing all of the above for their customers. Most businesses specialize in creating/providing a niche of products or services and that is usually what they do best. A company like Rubbermaid is extremely efficient at creating food storage containers.Another example is Bartle Bogle Hegarty, creative agency that is a leader in the marketing space. Rubbermaid wants to focus on growing their current business so they hire somebody like Bartle Bogle Hegarty to take care of their marketing.
Businesses who use fulfillment centers need to first ship their products to the fulfillment center to get the process started. Products can either be shipped from the business itself or even the manufacturer directly. At this stage, the fulfillment center counts products to ensure that the quantity of items received matches and the labels are correct. Depending on the requirements, they may also label the items at this stage.
Side Note: Some fulfillment centers even offer quality control services if the product is being shipped from the manufacturer.
Storage is a big component of fulfillment. Fulfillment centers charge their clients storage fees to store products. Storage fees are essential because items take up space and other resources. Whether the product sells or not, it is not the responsibility of the fulfillment center and this is a cost that is charged to the seller.
The rate charged depends on the size of the product and the number of SKUs (unique items) the seller carries.
Picking & Packing
Once an order is placed on the seller’s website or online marketplace, the fulfillment center is notified. It is now time to fetch that items sold from the warehouse to send to the party who placed the order. Staff at the warehouse will print a “Picking Slip” (different from Packing Slip), that shows them exactly what items sold, how many sold and where they are located.
Once the items have been picked, they are taken to the Shipping department where they are now packed. A lot of online sellers have their own custom packaging so they will send their own custom packaging for the 3PL to use as well. Many 3PLs will even offer the option to add promotional inserts such as a “Welcome Card” or business card with the order.
The last straw of fulfillment is the shipping. This is widely regarded as the most important part and where a huge chunk of the value of a fulfillment center lies. Let’s say a business does 100 orders per month. This shipping volume is nominal in the eyes of the carriers but they still offer between 10-15% off. A fulfillment center on the other hand is shipping 100s of orders per month for 100s of clients shipping thousands of packages per day. Their aggregated shipping volume is extremely high and the rates they are able to negotiate with carriers are far better than what 1 business would be able to get on their own.
Similar to how a manufacturer’s cost goes down if they produce a higher volume of a product, this is just economies of scale applied to shipping.
Fulfillment centers pass on these discounts over to their clients and as a result, a business who would only be able to get 10-15% off shipping can now enjoy higher discounts which they wouldn't have been able to achieve on their own.
Bonus: Returns Processing
As the demands of the market changes, fulfillment centers must adapt as well. It is common for fulfillment centers to offer Returns Processing as a service for their clients. Dealing with returns can be quite painful and slows down more important parts of the business. Returns Processing allows sellers to outsource the RMA process to the fulfillment centers as well. This can be done in many ways:
Pre-Paid Return Labels:
Fulfillment centers who offer this service give their sellers the option to include return labels for their customers. If this is something the seller wants to do, each order will go out with a return label.
Return Label Address:
Certain sellers don’t want their clients to know they are using a fulfillment center. This can be for a variety of reasons.
Depending on the business, there are businesses who don’t want their clients to know their exact address. If you sell high-end luxury products online, it is probably a good idea if people don’t find out where your warehouse is located.
Collect Returns vs Process Returns for Me:
Collect Returns = This is probably the more popular option. This is where sellers ask fulfillment centers to simply collect all returns on their behalf and the consolidate the returns back to the seller bi-weekly or monthly and then the seller deals with them how they like.
Process Returns for me = Some sellers want the 3PL to process returns for them. In this case, they outline detailed instructions on how they want to deal with the products. Depending on the instructions, products are then filtered into categories to be dealt with accordingly. Example = If a product was returned but has never been opened, add it to the inventory.
Fulfillment Center in Action
Like I mentioned in the Canadian Tire example, when someone places an order online, it is usually shipped from a fulfillment center. When you purchase items from Amazon, they are shipped from Amazon’s fulfillment centers. FBA is a term coined by Amazon that literally stands for Fulfilled-By-Amazon.
In fact, most of the items that are sold on Amazon are not owned by Amazon. Check this out:
Notice how it says Sold by ENVoice but Fulfilled by Amazon?
This business is using Amazon’s FBA service to fulfill their orders. ENVoice is selling items on Amazon.com and Amazon ships the product from their warehouse every time that item sells.
Btw, sellers on Amazon are not required to use FBA but it’s an optional service in case the seller needs it.
Who uses Fulfillment Centers?
Fulfillment centers are used by ALL types of businesses. Small businesses as well as large corporations all use fulfillment centers. Fulfillment centers are not limited to business types either. They are used by B2C, B2B and B2G companies alike.
B2C = The B stands for Business and the C stands for Consumers. These are businesses that primarily sell directly to consumers. If you look around your house, the items you have purchased are from B2C companies.
B2B = Business to Business. These are companies that sell to or service other businesses. An example would be a wholesale distributor of shopping carts. Most individuals have no use for shopping carts but every supermarket needs them.
B2G is Business to Government. Just like Consumers and Businesses, Governments are entities too. In fact, there are thousands of businesses that supply products to the government. Btw, these don’t even have to be “special products” that only the government has access to. It can literally be a business that sells toiletry to the government.
Fun Fact: Click HERE to see a list of products the Canadian government is currently looking to purchase.
Benefits of Outsourcing Fulfillment
Every business has their own reasons for why they hire a fulfillment center but there are definitely a lot of benefits that most fulfillment centers share:
Expand to New Markets
This is one of the biggest advantages of a fulfillment center. Often, companies want to start selling their products in international markets but they don’t have the resources to be able to relocate to a new country and grow operations there. In this scenario, they find a fulfillment center that can store and ship their products on their behalf.
Fulfilling orders on your own comes with many costs and a lot of these costs have their own add-on costs and they can extrapolate if not controlled properly. Some of the costs include:
Reducing costs is not only monetary but many companies also see fulfillment centers as a way of reducing liabilities. A lot of large corporations look to outsource to fulfillment centers because they’d rather pay calculated fees rather than have to deal with managing hundreds of internal staff.
Business growth is sometimes calculated but often unpredictable. The growth can also be turbulent and surprising. When signing a lease for a warehouse, it’s often a commitment of 3 or 5 years and the space available may not be enough to accommodate rapid growth.
Example = A Cyber-Monday sale can result in a large number of orders.
Another Example = A successful marketing campaign can result in a surge of popularity and push the company to another level.
In both cases, the current operations of the company may not be able to fulfill the orders on time. In this case, it would be a great idea to look into hiring a 3PL.
Focus on Growth/Automation
Every business has many core components. Some of these include Marketing, Accounting, Product Development, Business Development, Management etc. For a business that sells products online, Fulfillment is also a big component. Although it's a very important component, it is one that can easily be outsourced. Not having to deal with something like fulfillment allows businesses to focus on growing their business.
Is Outsourcing Fulfillment the right move for me?
I hate to say “it depends”, because yes everything depends but this is truly one of those things where your business goals matter. It could be the case that 2 businesses are operating in the exact same industry serving the exact same clients but it’s only beneficial for 1 of them to outsource fulfillment
Let’s say you created a cool set of speakers and started a kickstarter campaign to bootstrap your product. People loved them and now you have pre-orders of 20,000 units. I’d definitely point you in the direction of a fulfillment center as getting setup on your own while dealing with manufacturing, accounting, marketing and all other components, fulfillment centers will definitely help ease off the load and help get products to your customers faster.
On the other hand, if you were selling products that required high customization - like customized workbenches that require your client’s logo on them, I would advise against a fulfillment center. This is because each order is probably built to need and can’t be stored in a fulfillment center ahead of time.
If it was the case that this business is located in Japan and thinks it’s not worth it to ship 1 order at a time to the US, they might use a distribution center where they ship multiple items together and then have products individually shipped to their customers from that distribution center.
As a rule of thumb, fulfillment centers work great if you have a set of products that can be stored in inventory and are ready to be shipped. For products that are built after they are ordered/require high customization, using a fulfillment center is unlikely but still workable in certain cases.
If you want to continue this conversation, feel free to call us and we’ll be more than happy to answer any of your questions.
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